RBA urges CPI overhaul
By a staff reporter
The Reserve Bank of Australia (RBA) is urging an overhaul of Australia's approach to its consumer price index (CPI) to improve accuracy, and has asked an inquiry to recommend changes.
The central bank said that some practices surrounding Australia's CPI lagged behind other advanced economies, and said a monthly rather than quarterly report would help improve Australia's monetary policy framework.
"The Bank is strongly of the view that a monthly CPI constitutes best practice, and that more frequent data on prices would assist in the assessment of inflation trends in the economy," the RBA said in its submission to the 16th Series Review of the Consumer Price Index.
The RBA said the move would help bring Australia into line with other nations.
"The timely provision of accurate inflation data is critical to ensuring the sound conduct of monetary policy."
The central bank said that concerns held by the Australian Bureau of Statistics that issuing a monthly CPI report would be expensive would be outweighed by the benefits of ensuring that monthly interest rate adjustments were gotten right.
"Australia and New Zealand are the only countries in the Organisation for Economic co-operation and Development without an official monthly consumer price series ... Australia is the only economy in the G-20 without an official monthly consumer price series," the RBA said.
The central bank said that more timely data would help provide an earlier indication of the trend in inflation.
"It could also be helpful in distinguishing between signal and noise. In recent years there have been a couple of instances of quarterly readings for inflation that subsequently proved not to be representative of the general trend," its submission noted.
The RBA also said that the methodology used to measure price changes in the deposit and loan (D&L) facilities expenditure class were problematic, and the weighting of this component of the CPI, should be reassessed.
The central bank said that if improvements to the D&L methodology are not feasible, this item should be removed from the CPI, as it has been responsible for skewing the overall index, as its fourth largest component.
The RBA also recommended that expenditure weights in the CPI should be updated more frequently to reduce potential bias in the CPI, as practised in most advanced economies.
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